Last week’s terrorist attack in France should serve as a warning to investors on the consequences of political and policy weakness, said Michael Lewitt, an investment manager at Third Friday Group Llc.
“Just as Western nations can no longer pretend that failing to defend their borders or take the fight to ISIS in the Middle East will protect them from jihadist terrorism at home,” Lewitt said in a special Nov. 15 edition of his Credit Strategist newsletter, “investors can also no longer fool themselves into believing that markets will defy the reality that the world is buried in too much debt that it can’t repay.”
The Islamic State, also known as the Islamic State of Iraq and al-Sham (ISIS), claimed responsibility for the Nov. 13 attacks that killed at least 129 people and left more than 300 injured in Paris. France responded with a bombing campaign against ISIS targets in Syria and police raids of homes and other sites across the country to prevent additional attacks.
Last week’s violence occurred 10 months after terrorist group Al-Qaeda killed 11 people and injured 11 others in an attack on the offices of Charlie Hebdo, a French satirical weekly. After condemning the murderous rampage, Lewitt started printing the words “Je suis Charlie” ("I am Charlie") on the cover of his monthly newsletter as a sign of solidarity with proponents of free speech.
“As painful as last week’s bloody reality checks were, citizens and investors need to recognize how poorly their societies and economies are governed and start to demand change,” Lewitt said this week.
He says that markets are flashing warning signs of underlying economic distress, even as major stock indexes rally from an August decline of more than 10 percent. Meanwhile, the prices of materials including oil, copper and steel are collapsing.
“While the cap-weighted market indices have given up only modest ground, commodity prices and the majority of stocks are telling investors that the global economy is in serious trouble,” Lewitt said. “Just as the veneer of peace was shattered by violence last Friday night in Paris, the illusion of economic strength has been battered all year by the destruction of commodity and stock prices.”
Investors need to be aware of how geopolitics affect markets in ways that central banks can’t control by manipulating the money supply and credit growth. The Federal Reserve cut interest rates to nearly zero percent in 2008 as the U.S. economy declined the most in 80 years.
“Today’s global economy is much more fragile than it was on the cusp of the financial crisis, and the geopolitical situation is much more dangerous,” Lewitt said. “Those who believe that riding the wave of a central bank-induced bull market endowed them with intelligence are going to be sadly disabused of that illusion.”
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